Accounting for Business Combinations in the Healthcare Industry

Business combinations seem to have been accelerating in the healthcare industry over the past few years. A few of the key drivers of these mergers and acquisitions include private equity investments, strategic goals to expand services or diversify markets, and continued financial challenges from decreased grants and reimbursement rates. Whatever the reason may be, accounting for business combinations is important to ensure complete and accurate financial statements and taxes.

What Is a Business Combination?

The organization must first consider the definition of a business combination. What signifies that an organization has entered into a business combination? Well, a business combination has occurred if the acquirer has obtained control of one or more entities by purchasing a company’s net assets or a majority of voting equity interests. Business combinations impacting nonprofit organizations are the result of a change in control, which can be either a merger or an acquisition. If a transaction involves solely purchasing an entity’s assets, or the transaction occurred between entities under common control, this will not be constituted as a business combination.

Accounting for Business Combinations

Business Combinations are accounted for by the acquisition method of accounting under FASB Accounting Standards Codification (ASC) 805, Business Combinations. The acquirer will want to ensure that the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their fair value at the date the acquirer has taken control, which is known as the acquisition date. The difference between the purchase price, the fair value of the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree will recognize either goodwill or a bargain purchase gain.

Private Companies and Not-for-Profit Entities can elect an accounting alternative in which assets, such as customer-related intangibles and noncompetition agreements, can be combined with goodwill rather than be recognized separately; this also includes electing the accounting alternative for amortizing goodwill over 10 years and using a simplified impairment test. For any transaction costs, such as finder’s fees, legal fees, and any other professional or consulting fees, they will be recognized as expenses when they are incurred.

There are times when information is not present or known at the time of the acquisition date when the business combination transaction is recorded. In this case, the acquirer has up to a year from the acquisition date to adjust the provisional amounts for facts and circumstances that become known. This is known as the measurement period. Once these amounts are determined, they will be recognized as adjustments as either an increase or decrease to goodwill.

McKonly and Asbury has expertise in helping clients through the various stages of mergers and acquisitions, such as providing preliminary valuation support, performing quality of earnings engagements, conducting due diligence procedures, providing technical guidance for post-acquisition accounting and recognition, and assessment of the tax implications of the transaction. If your company needs any guidance and support relating to mergers and acquisitions, or to learn more about McKonly & Asbury’s Healthcare Practice, please contact the Healthcare Practice Leader and Partner, Janice Snyder.

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